Executive summary
Australia for many years now has been banking on a progressive economic growth and has not faced a serious recession. However due to the changing global scenarios and its major dependency on the continually slowing Chinese economy, it is facing a decline in its economic growth rate and the situation is likely to be more unfavorable in the near future. This paper will discuss who the slowdown In Chinese economy is causing to impact the growth of Australian economy. It will give an outline of some of the major areas of dependency of Australia’s economy on China. The report will further discuss how the Reserve Bank of Australia uses its interest rate policies to drive the economic change and growth in the country. The last part of the paper involves the discussion of the policies that the Australian Liberal party is implementing to drive growth in the economy.
Introduction
For more than 20 years, Australia has managed to avoid recession. This has been majorly characterized by the mining boom which they have been going through this period. However the major player for their mining boom has been the Chinese demand for their natural resources which they use as raw material in different industries. But with the continual slowdown in the Chinese economy, this demand is being hampered and is likely to go down further in the near time. Now the role of the Reserve bank of Australia and the newly elected Australian Liberal party led by Tony Abbott is of key importance to drive the Australian economy on a progressive path.
China’s economic slowdown and its impact on the Austrian Economy
The economic and structural changes in china
Before we study the impacts of China’s economic slowdown on the Australian economy, let’s first outline the economic and the structural changes in the Chinese economy. China has been achieving a GDP of 10 % on average for the last 20 years or so. But it was in March 2012 that the GDP target was cut down to 7.5 % which is the lowest of the last 20 years .
The political situation is China has been heating up since 2007. This has been due to the rising inflation in the residential property and the consumer goods. The Arab Spring has also been a factor of worry for the Chinese government and so has been the social media and the internet. The global financial crises has caused the government to lay emphasis on the infrastructural investment to keep the level of employment on check. They are bringing an increase in public housing to bring the costs down and are keeping a check on the infrastructural spending to avoid over capacities. This is affecting the large material producing industries such as steel, cement, gas etc. The government is also making policy changes for monopolies of pricing by the manufacturers and is bringing an increase in minimum wages. This is causing to decrease the corporate profit margins and increase the manufacturing costs. Many factory owners have closed down their business and this has impacted the country imports and exports. They are also focusing now more on domestic consumption rather than imports to support the local market .
Impact on Australian Economy
The resource sector of Australia which is largely concerned with the mineral and the mining industry is a major contributor to growth of the economy. Now with China being the major buyer of those natural resources and their current economic situation, this is causing a continual decrease in demand of these products which is impacting the country’s exports. The Strong demand from China, the weak overseas monetary policy, the tight internal monetary policy of Australia and its solid AAA status has been the driving force behind the growth. Now with the economic slowdown in Chinese economy and the loose domestic monetary policy, these two props of a strong Australian Dollar have weakened. Australia is exposed top China through major resources Stock especially BHP Billiton and Rio Tinto. The Chinese slowdown has caused them to underperform at the stock market where they are being said to be lower than the fair value.
RBA uses the interest rate to stimulate the economy
Owing to the dynamics and economic aspects that have engulfed the Australian economy in 2013, RBA needs to use the interest rate to stimulate the growth. The interest rates are what normally set path for how the domestic market operates. The need to fluctuate the interest rate is due to many different reasons. The unemployment rate in the country has shifted from 5 to 5.7 in 2013 which is the highest of the last 4 years. The labor market forward indicators are also down which are suggesting that the unemployment rate of about 6 percent is near. The annual inflation rate which is uncomfortably low at 2 percent is threating to go below the target band. The rate of unemployment, the growth rate and the inflation are major driver to urge what RBAS does to stimulate the economy.
The inflation rate measure of RBA has been 2.4 in the June quarter for 2013 which has been the 2nd lowest in the last ten years. RBA also focuses on the strength of the Australian Dollar which is relatively hire now in comparison to what it has been back in 2011. The CPI data has conformed for RBA that the inflation is quite low and is not showing signs of lift. Now what RBA can and will do here is shift its focus on full employment and the expansion of the local domestic market for that purpose. This allows RBA to bring a cut in the interest rate so that the money flow in the domestic market can be increased. What this does is serves as a boost for the mortgage holders and small business along with providing further incentive for ramping up the investment and spending. This will ensure that the economy show an upward momentum and will cause an acceleration in 2014. Well the recent scenarios have demanded a cut in rates from RBA and the situation would have been otherwise in the scenarios have been opposite. When the inflation rate is high, the rates are increased by RBA which is basic economics. RBA also fluctuates the bond rates and the bank policies to drive the economic growth in the country. There are many other approaches as to why and how RBA changes interest rate but the exposition is limited for that.
Economic policies of ALP to drive economic growth in the country
As the ALP government is still in its early days of rule, most of the policies that they have announced for economic growth are still in the development phase and provisions are being made for the purpose of their effective implementation. The economic policies and objectives which ALP has announced can be studies under the following headings.
Debt level and interest rate:
ALP has been pointing towards the public debt levels as it is very low as compared to the international standard. They have pledged that they will being down the interest as low as they can by ending the government waste, balancing the budget and paying back the debt .
Jobs:
ALP has announced about $1 billion for Australian jobs to support the companies for wining more work overseas and at home and for helping the growth of the small business.
Productivity:
APL has been focusing towards increasing the productivity of the country through skills development and education. They are of the view that providing skills education from the early age to the years of occupational education will help boost productivity and economic growth.
Personal income taxes:
They have announced cuts in income tax as part of carbon price (the clean household assistance and the clean energy future package). They also announced cut in taxes for companies to support the corporate sector and to encourage investment.
Conclusion:
The paper suggests that the external macro environment for Australia is indicating a shift in global economic scenarios and especially its major target markets for exports i.e. China. They have been investing more and more in the mining sector for production of natural resources for exports and those exports have seen a drastic cut in demand due to Global financial crises and the continually slowing Chinese economy.
Recommendations and suggestions
The government of Australia has not been focusing much on the development of the domestic market and expansion of its international market. They need to support the smaller businessmen more and more to encourage the development of more local business. The inflation rates have been evidently low which shows that the economy needs expansion and the RBA needs to formulate policies that would inject more investment for the local producers and the small businesses. Not only would this expand the domestic output circle but would also create jobs to cater a low but increasing rate of unemployment.
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